Kratos Defense (KTOS) Misses Q4 EPS by 1c, Revenues Miss; Offers Q1 Revenue Guidance Below Consensus

Kratos Defense (NASDAQ: KTOS) reported Q4 EPS of $0.09, $0.01 worse than the analyst estimate of $0.10. Revenue for the quarter came in at $185.1 million versus the consensus estimate of $197.34 million.

Eric DeMarco, Kratos’ President and CEO, said, “Over the past few months, Kratos’ Unmanned Systems business made important progress, including the successful initial flight of the Gremlin UAS, the fourth successful flight of the Valkyrie and tactical UAS system payload integration, missionizing and operational planning now underway. Though the three-month Continuing Resolution Authorization (CRA) that began the 2020 fiscal year, along with the now addressed Valkyrie recovery system anomaly delayed Kratos’ previous Valkyrie program plans, we understand that there is now funding in place, we have clarity on expected contract awards and we are working towards our initial anticipated production and system orders. As a result of the related clarity we now have, in coordination with the XQ-58 Valkyrie stakeholders and our expectation for contract awards, we have initiated the production plan for 12 Valkyries, with these aircraft deliveries expected to begin early next year.”

Mr. DeMarco continued, “In addition to Kratos’ Valkyrie and Gremlins programs, which are just two examples of our large and growing customer funded tactical drone portfolio, we also are seeing increased and accelerating interest in Kratos’ other tactical drone systems. As we begin 2020, we expect Kratos’ affordable, high performance tactical drones to be key elements of several new DoD programs and initiatives, including Skyborg, Advanced Battle Management System or ABMS and Vanguard.”

Mr. DeMarco concluded, “Today approximately 25% of Kratos business is in unmanned systems, 30% in space and satellite communications and 45% in C5ISR, including microwave electronics and electronic warfare, training solutions, missile systems, missile defense, radars, hypersonic systems and turbine technologies. We believe that Kratos is clearly aligned with the U.S National Defense Strategy as most recently reflected in the 2020 DoD budget request and five year defense plan.”

GUIDANCE:

Kratos Defense sees Q1 2020 revenue of $160-170 million, versus the consensus of $190.54 million.

Kratos is providing first quarter 2020 financial guidance of Revenues of $160 to $170 million, and Adjusted EBITDA of $12 to $15 million. Kratos is providing initial full year 2020 financial guidance for Revenues of $740 to $780 million, Adjusted EBITDA of $72 to $78 million, cash flow from operations of $30 to $50 million and Free Cash Flow generation of $7 million to a use of $18 million, including capital expenditures of $43 to $48 million (See Valkyrie discussion below). Kratos’ full year 2020 initial financial guidance forecasts a revenue and Adjusted EBITDA trajectory similar to prior years, with the first fiscal quarter being the lowest of the fiscal year, with sequential quarterly increases thereafter.

Kratos’ initial 2020 financial guidance reflects full year 2020 over 2019 organic revenue growth for every Kratos business unit except Training Solutions, which we are currently guiding for an approximate $40 million fiscal 2019 to 2020 revenue decrease, primarily as a result of a previously disclosed ongoing contract protest and/or modification situation. We will adjust our financial forecast as appropriate as this protest/contract situation evolves. A forecasted reduction in operation tempo from 2019 activity on this project is also reflected in the first quarter 2020 guidance.

Kratos’ first quarter and fiscal 2020 revenue guidance also reflects an expected continued decrease of approximately $10 million related to the Company’s legacy government services business.

Kratos’ initial fiscal year 2020 guidance excludes any potential contribution from expected Valkyrie or other tactical drone production or system contracts, with expected orders to be taken into consideration and our financial forecast adjusted once such contracts/orders are received and related financial contribution can be estimated.

The 2020 capital expenditure forecast currently includes expected outlays of $15 to $17 million associated with production of 12 Valkyrie aircraft prior to receipt of expected customer production award(s) and therefore reflected as Company-owned tactical drones until receipt of customer award, and approximately $5 million related to production of Company-owned aerial target drone systems in preparation of fulfilling forecasted customer requirements. Kratos will adjust/reduce these initial forecasted capital expenditure outlays once expected customer orders are received and the related financial contribution can be estimated.

Kratos recently won and received a new, approximately $50 million C5ISR single award contract, which we have currently excluded from our initial 2020 financial guidance due to a competitor’s protest, which situation is ongoing. We will adjust our financial forecast as appropriate as this protest/contract situation evolves.

For earnings history and earnings-related data on Kratos Defense (KTOS) click here.

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